Google Is Grasping

Google thinks it’s found the next way to squeeze ad dollars from the internet. It’s going to run translucent ad panes at the bottom of videos at YouTube. It hopes to combine its AdSense system, which contains the web’s biggest database of online advertisers, with YouTube, which attracts the web’s biggest video viewing audience. If this works, it could be the next leg up for Google over rivals Microsoft and Yahoo.

There are problems, though:

  • Most video content at this stage is bad, made mostly by bored teenagers
  • It’s a lot harder for an advertiser to make a good video commercial than it is for them to type a text ad
  • Video content is more subjective than search keywords, making it harder to keep ads relevant
  • Anybody who spends much time on YouTube is not part of a desirable demographic, by virtue of their having nothing better to do than watch mindless amateur videos

To be fair, not all the clips at YouTube are lowbrow, nor all the viewers. From what I’ve seen, though, it’s hardly an Overachievers Anonymous recruiting ground.

There’s potential here, but it doesn’t look nearly as promising as Google’s original AdSense and AdWords. To me, this latest move is evidence that Google is grasping at straws for its next revenue stream because its existing text ad business is about tapped out, it has nothing in the way of non-ad revenue to grow, and it needs to do something with YouTube besides defend itself against copyright infringement lawsuits.

Morgan Stanley Internet Analyst Mary Meeker wrote last week that the new ads could create $4.8 billion of gross revenue and $720 million of net revenue in Google’s annual results. That looked startlingly high to a lot of folks, and Henry Blodget decided to look into it:

Well, we were baffled at how Mary could be so amazingly bullish, so, on a tip from a reader, we checked her numbers. And it seems Mary may soon be revising her estimates. Why? Because, in advertising lingo, “CPM” means “Cost Per Thousand” not “Cost Per One.” When Mary updates her model to divide by 1,000, her numbers will look a bit different.

What happens to Mary’s estimates when you do the math right? Well, that $4.8 billion of gross revenue becomes $4.8 million, and the $720 million of net revenue becomes $720 thousand. So if, as Mary suggests, Google can float ads on top of 20 million streams a month, secure a $20 CPM, and keep 15% of the gross revenue, the overall impact will actually be, as we suggested yesterday, immaterial.

His complete comments are here.

You may have noticed that there are no Google text ads on this page anymore. I pulled all of them because they were increasingly irrelevant to my content, distracting to my readers, and suffering from a declining revenue stream to this site despite the site’s growing traffic.

That’s fantastic real-world research, and I continue to think Google is vulnerable to a slowdown in its ad revenue, which is to say, its only revenue.

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